Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number 000-27427

ALTIGEN COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o    No ý

        The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $46,327,048 as of March 31, 2004, based on the closing price of our common stock as reported on The Nasdaq Small Cap Stock Market on such date. Shares of common stock held by each officer and director and by each person known to own 5% or more of our outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 31, 2004, there were 14,210,081 shares of the our common stock issued and outstanding.

        As of December 22, 2004, there were 14,530,712 shares of our common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Certain sections of AltiGen Communications, Inc.'s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on February 10, 2005 are incorporated by reference in Part III of this Form 10-K to the extent stated herein.

TABLE OF CONTENTS

2

PART I

Item 1. Business

INTRODUCTION

        AltiGen Communications, Inc. (NASDAQSC: ATGN) is a pioneer and market leader in Internet protocol telephony systems for small-to-medium sized businesses. We design, manufacture and market next generation, Internet protocol phone systems and contact centers that use both the Internet and the public telephone network to take advantage of the convergence of voice and data communications. Unlike traditional proprietary phone systems, our systems are designed with open architecture and are built on an industry standard platform. This adherence to industry standards allows our products to play an important role in the small-to-medium sized business market by delivering phone systems that can integrate with other technologies and provide integrated voice and data solutions. We believe this enables our customers to implement communication systems that have an increased return versus past technology investments. We generated net revenues of $14.8 million, for a net profit of $28,000, during fiscal year 2004. As of September 30, 2004, we had an accumulated deficit of $50.8 million. Net cash used in operating activities was $185,000 for fiscal year 2004.

        Our principal executive offices are located at 4555 Cushing Parkway, Fremont, California 94538. Our telephone number is (510) 252-9712. We were incorporated in California in May 1994 and we reincorporated into Delaware in June 1999.

        We maintain an Internet website at http://www.altigen.com. Our most recent annual report on Form 10-K and certain of our other filings with the Securities and Exchange Commission (SEC) are available through the Investor Relations section of our website at http://www.altigen.com/company_investors.html. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other required filings and amendments to these filings are available on the SEC website at http://www.sec.gov, which can be reached from our Investor Relations website. In addition, you may read and copy any material we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy, and information statements, and other information regarding registrants that file electronically with the SEC at http://www.sec.gov.

INDUSTRY BACKGROUND

        We focus on the small-to-medium sized business and mid enterprise business market, which represents approximately 14 million businesses in the United States. Our telephony products primarily are sold to small-to-medium sized businesses, multi-site businesses, corporate branch offices and call centers. Entering 2004, we primarily operated in the Americas and the Asia Pacific region and have begun to penetrate the European community through sales in the United Kingdom and Norway.

        The focus and growth of our call center solution sales and the strengthening of the United States economy overall helped us to counter balance the negative economic effect that the devastating hurricane season had on the eastern United States this past year. As a result, we reached a significant milestone of a full year of profitability and the posting of strong revenues. The trends that we believe will continue to positively impact us are the continued acceptance and market growth of Internet protocol telecommunications solutions and telephone systems, like those we sell in the United States and in the Asia Pacific region. In fiscal 2004, we maintained our effort on the telephone system market while increasing our focus on the small-to-medium sized call center market. In 2004, we also continued to focus on broadening our product portfolio, increasing our geographic markets and strengthening our channel of distributors and resellers. For 2004, our geographic market expansion strategy included building out our worldwide reseller base and growing our presence throughout Asia Pacific and

3

Europe; including new reseller and distributor relationships with several parties in Asia Pacific that we believe will fuel expansion into the Asian market. Our international business grew significantly in the past year, with particular strength in China, where we substantially increased our revenues. Based on our financial position, our broad product offerings and assuming the continued growth of international markets, we believe that we are well positioned to maintain our positive momentum into fiscal year 2005.

Convergence of Voice and Data

        Traditionally, businesses have supported two separate, incompatible networks to handle their communications needs. The first network has been the traditional telephone network, which relies on a technology called "circuit-switching." A circuit-switched network establishes and maintains a dedicated (i.e. not shared) line between calling parties for the duration of a call. The second type of network on which businesses have traditionally relied is a "packet-switched" network, such as an internal local area network or an external network, like the Internet, where voice, video, images or data is divided into small Internet protocol packets of information for transmission that are simultaneously combined with other unrelated packets of information and routed to a final destination where this process is reversed. Packet-switched networks are more efficient than the traditional circuit-switched telephone network, because network paths are not dedicated to a single user, but instead are available to be shared by all users. As a result, network capacity is allocated more efficiently. It is commonplace for networks installed today to be able to support both voice and data usage with Internet protocol packet-switching.

        A growing number of businesses have recognized data networks as a valuable and economical medium for internal and public communications. These businesses seek to simplify their telecommunication systems by moving their voice communications to packet-switched networks, such as corporate intranets and the Internet. Although intra-company voice communications via packet-switched networks can offer value by lowering the cost of communications between locations and the ability to unify multi-site businesses and better support remote workers, business-to-business and business-to-consumer communications accomplished by traditional circuit switched telephone networks remain the most prevalent method for voice communications. Businesses that wish to take advantage of packet-switched networks for voice communications, therefore, must be able to place and receive calls over traditional telephone networks with customers, suppliers and others who rely solely on the traditional networks for voice communications. Consequently, there is a need for one common switching system that can interface with both packet-switched networks and traditional, circuit-switched, telephone networks.

        Most existing telecommunications systems do not address the needs of businesses that wish to transmit voice communications over both traditional telephone networks and packet-switching networks. For example, businesses may wish to route internal calls over their existing voice network and route calls between offices over packet-switched networks, all using the same telecommunications system. We believe a significant opportunity exists to provide small-to-medium sized and mid-enterprise businesses with an integrated phone system that delivers the benefits of integrated, multi-function telecommunications systems using Internet protocol packet switching networks as well as traditional circuit-switched telephone networks.

THE ALTIGEN PRODUCT OFFERING

        The foundation of every member of the AltiServ™ product family is an Internet protocol business telephone system and call processing telephony architecture. The operating system for the AltiServ™ product family is AltiWare™ Open Edition. AltiWare's system design can be configured to integrate call processing and routing with digital, analog and Internet protocol trunks, Internet protocol and analog extensions, voicemail, auto attendants and other voice processing and voice recording resources, including an integrated call center application, all in a single high performance chassis. We have

4

optimized our Internet protocol telephone system performance in voice over Internet protocol environments by delivering a feature-rich business telephone system that supports the Bellcore Standards and Internet protocol standards on a single open platform.

        The AltiServ™ Office family systems are complete Internet protocol business telephone systems that are pre-configured on custom designed and manufactured industrial telephony server platforms. We pre-load the system with our AltiWare™ telephony software and Windows based system software, eliminating the need for resellers to load the appropriate system software from scratch, allowing for faster, smoother installations with higher levels of reliability.

        The AltiServ™ product family of Internet protocol business telephone systems can be implemented for businesses requiring as few as eight extensions and supporting up to 400 users per individual system. Each individual system offers highly scalable single system growth with the ability to continue to expand by networking multiple local and remote systems together. These networked systems can be at a single site, a campus environment or multiple locations throughout the world using Internet protocol technology to link them. The AltiServ™ product family supports systems with logical stepped increments to allow an affordable entry point while maintaining a strong scalability and system growth. In 2004, we consolidated the AltiServ™ chassis options in order to reduce our overall manufacturing costs. At the same time, we offered more flexible foundation platforms to give our resellers greater ability to adapt to the needs of their customers with cost effective solutions such as the use of additional call processing telephony boards to individual systems to either accommodate system capacity growth or to support additional telephony applications like conferencing, centralized recording and call center capabilities. These call processing telephony boards are designed to handle specific requirements like supporting Internet protocol trunks and Internet protocol extensions or analog trunks and extensions. Internet protocol telephony boards can be used to perform Internet protocol gateway functions to tie systems together over the Internet, a wide area or a local area network. High capacity digital telephony boards can provide communications via T1 or E1 and Integrated Services Digital Network/Primary Rate Interface connections if desired. A T1 line is a single high capacity digital telephone trunk line that consists of 24 individual channels, each of which supports a transfer rate of 64K bits per second. The E1 is the European high capacity digital trunk standard that consists of 30 individual channels. With AltiServ™ systems, all features can be integrated into a single system chassis for simplicity. The call switching, voicemail, automatic call distribution, automated attendants, conferencing resources, e-mail integration and computer telephony integration are core capabilities provided by AltiWare™ at no additional cost.

        In fiscal 2004, we reached another important milestone by releasing Altiware™ 5.0 our sixth generation of telephony software. The AltiWare™ 5.0 software release is the culmination of a 10 year engineering cycle of innovation on the AltiServ™ product family AltiWare™ 5.0 offers our customers both advanced and mature Internet protocol private branch exchange features and significantly improves the call center capabilities of the AltiServ™ family of business telephone systems. The AltiServ™ family of systems and solutions with AltiWare™ 5.0 offers resellers greater opportunities to provide solutions to a wider variety of business needs. Resellers can address businesses' needs of an advanced telecommunications solution, such as AltiServ™ Voice Over Internet Protocol business telephone systems, and also pursue and deliver successful implementations for businesses requiring advanced call center solutions, or integrated, centralized call recording, such as our AltiContact™ Manager.

        With the release of AltiWare 5.0, we continued to deliver meaningful capabilities to the small-to-medium sized business market. In this release we focused on key areas including mobility, reliability and customer contact applications, which we believe are critical for our customers business success.

•

For mobility, we released our ExtensionAnywhere™ capabilities, which allows users of our telephone systems to use their mobile or cellular phones as their extensions.

5

•

For improved reliability, we now offer AltiWare™ system redundancy to allow our telephone systems to operate in a redundancy configuration.



•

For improved customer contact capabilities, all our telephone systems now include the AltiServ™ Contact Center, a full suite of call center capabilities, making them ideal for customer-focused businesses needing a complete call center.

        AltiWare™ 5.0 offers businesses a simplier alternative to the traditional approach of constructing a telephone system or contact center by integrating multiple systems. Until now, businesses were required to purchase an entirely separate system for capabilities such as advanced routing, centralized call recording, automated attendants, interactive voice response applications, or telephony integration with Customer Relationship Management applications. With AltiWare™ 5.0, these features are now included with an AltiServ™ system and, through licensing of additional features, customers can simply turn on select capabilities and functions as needed. The outdated multi-system approach was complex to deploy, difficult to manage and expensive. Our modular feature licensing allows businesses to add capabilities on a per feature or per user basis. The goal of flexible and modular feature licensing is to offer a reduced up front investment and allows businesses to affordably implement advanced call center capabilities in even the smallest workgroup configurations.

        In 2004, we have also enhanced the overall look and feel of all administrative interfaces and desktop personal computer software. With a focus on ergonomics and usability, all desktop personal computer software and administration interfaces were redesigned, to include new capabilities for all desktop computer clients (AltiConsole™, AltiAgent™, AltiSupervisor™, AltiView™, AltiContact™ Manager Administrator).

        Also in 2004, we introduced the AltiTouch™ 500 telephone and improved our Alti-IP™ 600 Internet protocol telephone. We believe that these developments in fiscal year 2004 have prepared us to make further strides in our product and market penetration during fiscal year 2005.

        In 2003, we first announced certification of the out-of-the-box integration of AltiServe™ Contact with Microsoft® customer relationship management. We feel that this integration is a key contributor in broadening our ability to provide solutions to small-to-medium sized call centers that leverage emerging market solutions. In 2004, we continued to augment our application integration solution. We provide automated "screen-pop" capabilities that present customer records to an employee's desktop computer with inbound telephone calls to help businesses reduce transaction times and improve customer service. AltiWare™ 5.0 provides increased Microsoft customer relationship management functionality, including a customer relationship management record dial-by-name search and dial facility and adds an integrated "dial-out" button to contact and account records. Additionally, call history logging to customer relationship management activity records is automatic. In 2004, we had our certification renewed by Microsoft. As a gold certified independent software vendor there are joint marketing opportunities that include, but are not limited to, our participation in Microsoft events, access to event sponsorship and access to Microsoft solutions, developer support, its resellers and customers.

        Key benefits of our phone systems include:

•

Reduced Administration Costs.    Our administration user interface allows customers to administer their own telephone system, allowing businesses to reduce their reliance and the associated expense of third party service providers to perform tasks as simple as making changes to a phone extension or adding a phone line. The associated expenses typically referred to as adds, moves and changes can be a significant percentage of the ongoing operating cost of any business telephone system. Our AltiServ™ systems allow system administrators to perform many of these tasks without assistance from third parties.

6

•

Lower Toll Costs.    By routing voice over data networks, including the Internet, our systems reduce toll charges associated with long-distance calls between locations served by our telephone systems and external Internet protocol extensions. Using our products, businesses can send and receive voice communications over the Internet or existing data lines that constitute their corporate intranet.



•

Integrated Communications.    Our systems provide the benefits of converging communications infrastructure by enabling businesses to route voice calls over either Internet protocol packet switching networks and other data networks or a traditional telephone network. This integration allows a multi-site business to operate under a unified dialing plan and allows users in different sites to operate as if they were supported by a single system rather than an individual system for each location.



•

Innovative Productivity Features.    Our systems provide integrated voice and data capability, allowing numerous features previously available only with a combination of multiple systems, typically from different vendors. Our AltiServ™ system has typical call handling and routing functions, as well as specialized productivity functions such as Zoomerang®, which enables users to retrieve a voicemail message, automatically place a return call to respond to a voicemail and then return to the voicemail system all in the same call to continue reviewing and responding to other messages.



•

Innovative Desktop Productivity Software.    Our systems support Windows-based desktop applications designed to increase user productivity by bringing call control and visual voice mail management to the desktop and improve the ability to manage telephone calls and voicemail and the basic configuration option for each extension such as forwarding and one number access. There are applications designed specifically to enhance productivity for three fundamental user environments; the business users, the workgroup members and contact center agents and for workgroup supervisors. These desktop software productivity applications work with all AltiServ™ Office, AltiServ1™ IP, AltiServ™ H-PBX and AltiContact™ Manager systems are designed to work with our agent and supervisor desktop applications, AltiServ™ Contact Center and AltiContact™ Manager systems to improve agent performance and give supervisors the information and tools to effectively manage a workgroup.



•

Desktop Customer Relationship Management Database Software Integration.    The AltiView™ and AltiAgent™ desktop interfaces provided automatic contact record retrieval and "screen pops" of contact records to a user's desktop. Microsoft Outlook® users can type in a name to automatically retrieve telephone numbers and click and dial from an integrated contact record directory. Certified integration to the new Microsoft® customer relationship management software is provided with two of our products, AltiContact™ Manager and AltiServ™ Contact Center. This out-of-the-box Microsoft® customer relationship management integration offers businesses a comprehensive and affordable contact center solution. We provide built-in integration with other Microsoft software applications like Microsoft customer relationship management, Microsoft Outlook™ and Microsoft Exchange™. Our contact center integration capabilities help lower system integration costs and shorten deployment timeframes for computer telephony integration with customer relationship management solutions.



•

Ease of Installation, Use and Maintenance.    The AltiServ™ Office system and AltiServ™ Internet protocol system are designed to allow for easy installation and system maintenance. AltiServ™ systems enable system administrators to manage the call routing, extension management, voice messaging, email and Internet features of our products through a single AltiWare™ administrator interface. As a result of our use of industry standard inputs and control through a single interface, we believe that AltiServ™ systems make it easier for resellers and end-user customers to implement and maintain our systems as opposed to other telephony

7

technologies that may require many disparate components and multiple servers to provide similar functionality.

•

Improved Customer Contact Capabilities.    The AltiServ™ Office systems and AltiServ™ Internet protocol systems provide integrated contact center functionality with our AltiServ™ Contact Center software module. For more advanced call center or centralized call recording requirements we offer the AltiContact™ Manager software application. Both contact center applications are designed to enhance our customers' communications with their customers by employing comprehensive contact center and call center routing, reporting and recording technologies.



•

Integrated Centralized Call Recording.    Voice calls can be recorded on demand by employees, agents and supervisors or automatically recorded centrally by the AltiContact™ Manager system using pre-set parameters. No additional hardware or software needs to be added for the advanced centralized recording. Traditional systems businesses were required to purchase an entirely separate system for capabilities such as centralized call recording with customer relationship management applications. With AltiWare™ 5.0, these features are now included with an AltiContact™ Manager system, and through an additional license, customers can simply turn on centralized call recording capabilities and functions as needed. Modular feature licensing allows businesses to add capabilities on a per-feature or per-user basis offering a reduced up-front investment.



•

Improved Employee Mobility.    ExtensionAnywhere™ Capabilities—This revolutionary new feature allows our Internet protocol telephone systems to offer support of cellular telephones as extensions. Going beyond old-fashioned call forwarding, ExtensionAnywhere™ allows any mobile telephone with a unique number to be bound to our system and become an extension. With this revolutionary feature, any cellular or mobile telephone can become an AltiGen telephone system extension with the same routing, call handling, call transfer, conferencing and voicemail capability as any internal extension.



•

Improved System Reliability.    AltiWare™ System Redundancy—The AltiWare™ 5.0 release provides new redundancy capabilities to allow our telephone systems to operate in a redundancy configuration. In this configuration, two systems, primary and backup, are configured and connected. The primary AltiServ™ system assumes control of all operations while the backup AltiServ™ system will replicate all configuration, routing, voicemail files and custom phrases from the active server. The backup AltiServ™ system will also monitor the primary AltiServ™ server status and automatically take over if the primary system becomes unavailable.

8

PRODUCTS

        The following is a list of our products that are material to our current operations from a financial standpoint:

9

10

11

12

AltiGen Hardware and Firmware

        We have developed a single base circuit board with high performance digital signal processing technology, which means that the circuit board has an integrated computer built on it that can run special, high-speed software programs, called firmware. Firmware can receive, send and modify digital information for communications with network services. Our Triton™ family of digital signal processing board is designed to allow us to create different circuit boards to meet many communication requirements by simply adding a few hardware and/or software components to the basic board. For example, the Triton™ digital signal processing board can become a T1, E1 or Integrated Services Digital Network communication circuit board or a circuit board supporting voice over Internet protocol with simple changes in on-board software and, in some cases, new circuits.

        This modular design not only enables us to provide new capabilities, but we also feel that it enables our products to achieve a high degree of reliability and cost reduction since the underlying technology is consistent across our products.

AltiGen Modular Software

        Our software products are based on modular software components similar to the concept described above for our hardware and firmware. The service provider layer of software is composed of separate software components, each of which communicates with a hardware circuit board within the AltiServ™ system. The middleware layer interacts with all the service providers in the system and manages their resources. This middleware layer communicates with the hardware and allows application programs to provide specific features. The application program layer consists of components that implement the application logic, such as voicemail and auto attendant. These applications do not depend on any particular hardware integration.

        We believe that the layered architectural structure of our AltiServ™ products provides important benefits:

•

New features can be developed without changing hardware



•

Development time generally is shorter



•

New hardware and software features can be added to installed systems



•

Changing one component in the system does not require other components to be changed.

13

Net Revenues by Products:

MARKETING, SALES AND CUSTOMER SUPPORT

Marketing

        Our marketing efforts currently focus on increasing demand for our products in the Americas, Europe and Asia Pacific. We are working to increase market awareness of our technology and demand for our products in the small-to-medium sized business and call center markets through public relations, print, email and web campaigns.

        Among our marketing highlights are the following awards:

•

Best of Show at INTERNET TELEPHONY® Conference & EXPO Miami 2004 (AltiServ™ H-PBX, Hosted VoIP Phone System)



•

Customer Inter@action Solutions Magazine's "CRM Excellence" Award for 2004 (AltiServ™ IP Phone Systems recognized for providing customers with superior customer relationship management capabilities)



•

Customer Inter@action Solutions Magazine's "CRM Excellence" Award for 2004 (AltiContact™ Manager recognized for providing customers with superior customer relationship management capabilities)



•

Best of Show at Internet Telephony® Conference & Expo Fall 2004 (Altiware 5.0™ Telephony Software)

        To assist our distributors, dealers and strategic partners, we provide market development funds, marketing tools and technical and sales training developed specifically for our products. We expect that these programs will allow us to leverage the expertise and contacts of the local and regional reseller channel to create strong lead generation.

Sales

        We are organized as one operating segment. Our revenues primarily are generated from one geographic area, the Americas.

Net Revenues by Geographic Area:

        We currently have sales and support staff in New York, Illinois, Nevada, Florida, Virginia, China and in our headquarters in Fremont, California. Our inside sales force answers incoming calls from end users and refers new leads to a qualified dealer near each end user's location. The inside sales force also is responsible for account management of our smaller resellers. Our outside sales force, which is primarily based in the Americas, includes regional directors, regional sales managers and technology solutions managers who work with our larger resellers and recruit new reseller partners. In fiscal 2004,

14

we continued our expansion to a more scalable reseller community by signing on an increasing number of resellers that currently sell traditional and Internet protocol telephone systems manufactured by companies such as Avaya, 3Com, Nortel, Comdial and NEC.

Customers

        Our direct customers primarily are distributors and resellers who sell our products to end-users. We have distribution agreements with AltiSys, Ingram Micro, Graybar and Synnex in the Americas. Our agreements with AltiSys, Ingram Micro, Graybar and Synnex have initial terms of one year and are renewed automatically for additional one-year terms, provided that each party shall have the right to terminate the agreement for convenience upon 90 days' written notice prior to the end of the initial term or any subsequent term of the agreement. In addition, our agreements with AltiSys, Ingram Micro, Graybar and Synnex also provide for termination, with or without cause, by either party upon 30 days' written notice to the other party without penalty, or upon insolvency or bankruptcy. For a period of 60 days' following termination of the agreement, AltiSys, Ingram Micro, Graybar and Synnex may distribute any products in their possession at the time of termination or, at their option, return any products to us that are in their inventories. Upon termination of the distribution agreement, all outstanding invoices for the products will become due and payable within 30 days' of the termination.

Net Revenues by Customers:

        We also have over 200 authorized resellers who sell our products directly to end-users. We review our resellers quarterly and discontinue distribution through those who do not meet our revenue or technical standards.

Customer Support

        We believe that consistent, high-quality service and support are key factors in attracting and retaining customers. Our customer support groups, located in California, New York, and Shanghai, coordinate service and technical support of our products and provide service twenty-four hours a day, seven days a week. Our support personnel assist our distributors and resellers in resolving installation and support issues that arise from their sales to end users and also provide limited support to end-users to supplement dealer support. Resellers and end user customers also can access technical information and receive technical support through our web site.

RESEARCH AND DEVELOPMENT

        The market for our products is characterized by rapidly changing technology, evolving industry standards and frequent product introductions. We believe that our future success depends in large part upon our ability to continue to enhance the functionality and uses of our core technology. We intend to extend the functionality and uses of our hardware and software technology and develop new products by continuing to invest in research and development.

        We currently are developing enhancements to our products to provide greater functionality and increased capabilities. We also are developing products that we expect will enable us to enhance our position in the Internet protocol phone system market space, enter new geographical markets, and allow us to enter the call center market for small-to-medium sized businesses.

15

        We currently conduct the majority of our product development in-house. We also use a small number of independent contractors to assist with certain product development and testing activities. We intend to continue working with our strategic partners to enhance our products. As of September 30, 2004, we employed 50 individuals in engineering, research and development and support.

        During fiscal 2004, 2003, and 2002, our research and development expense was approximately $3.3 million, $4.0 million, and $4.1 million, respectively.

COMPETITION

        The markets for our products are intensely competitive, continually evolving and subject to changing technologies. We currently compete with companies providing traditional telephone systems and attempting to launch competitive Internet protocol enabled solutions, principally Avaya Communications, NEC and Nortel Networks. We also compete against companies providing only Internet protocol and Internet protocol-enabled telecommunications systems, such as 3Com Corporation and Cisco Systems, Inc. Many of our competitors are substantially larger than us and have significantly greater name recognition, financial, sales and marketing, technical, customer support, manufacturing and other resources. These competitors also may have more established distribution channels and stronger relationships with local, long distance and Internet service providers. These competitors may be able to respond more rapidly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products.

        These competitors may enter our existing or future markets with products that may be less expensive, that may provide higher performance or additional features or that may be introduced more quickly than our products. In fiscal 2004, we believe that we continued to be both feature and price competitive. Additionally, we feel we provide a low ongoing cost of ownership. We believe that our principal competitive advantages include:

•

System designed for small-to-medium sized business budgets;



•

Ability to reduce communications costs;



•

Ease of system manageability;



•

Ease of use;



•

Simple deployment in single and multi-site implementations;



•

Strong product development;



•

Experience in service and technical support of Internet protocol telephony;



•

Complete call center application now standard with all AltiServ™ systems;



•

Complete call processing and voice processing resources in every telephony board;



•

Decentralized voice processing support for advanced and integrated telephony application;



•

Innovative mobility capabilities supporting mobile telephone devices as telephone system extensions; and



•

Highly reliable redundant configurations supported.

INTELLECTUAL PROPERTY

        On September 26, 2003, we entered into a royalty free-based object license agreement with Delphi Communication Systems, Inc. The agreement may be terminated by either party if the other party

16

commits a material breach of the agreement and fails to cure the breach within thirty days after the notice has been given by the other party.

        We generally rely upon patent, copyright, trademark and trade secret laws to protect and maintain our proprietary rights for our technology and products. As of September 30, 2004, we have been issued three registered trademarks, "AltiGen," "AltiServ" and "Zoomerang." In addition, the AltiGen logo is a trademark of AltiGen in the United States and other jurisdictions.

        We have filed several U.S. patent applications relating to various aspects of our client and server software, mixed-media communications and computer telephony. As of September 30, 2004, we have been issued seven U.S. patents that expire at various times between 2016 and 2019 and have 11 U.S. patent applications which are pending. We expect to continue to file patent applications to protect our technology and products. We cannot be sure that our patent applications will result in the issuance of patents, or that any issued patents will provide commercially significant protection for our technology.

MANUFACTURING AND ASSEMBLY

        Our manufacturing operations consist of two phases. In the first phase, we send out the components to a third party assembler. The third party assembler company auto-inserts the components into the printed circuit boards and returns the assembled circuit board back to us. In the second phase, we insert the assembled circuit boards into the burn-in process for a minimum of two weeks and after that we perform the final test of the circuit boards. In fiscal year 2004, we engaged All Quality Services and Bestronics in San Jose as our third party assemblers. During fiscal 2004, four suppliers, Advantech, BCM Computers, Fanstel Corporation, and Avnet Electronics, provided us with approximately 81% of our hardware product components. We purchase fully-assembled chassises from Advantech. As of September 30, 2004, our in-house manufacturing operations occupied approximately 7,000 square feet of our corporate headquarters in Fremont, California.

        We test our products after the assembly process using internally developed product assurance testing procedures, which include visual inspection, functional testing and final systems testing. Although we generally use standard components for our products and try to maintain alternative sources of supply, we purchase some key components from sole source suppliers for which alternative sources currently are not available. We incorporate the following sole sourced components in our products:

•

Zarlink Corporation chips are included in all of our boards and are the means by which our boards communicate with each other to enable our products to function correctly.



•

Texas Instruments' digital signal processor ("DSP") chips are included in our Triton™ family of boards. The DSP chip is designed to perform the mathematics, data compression and other tasks that are needed to manipulate voice communications that are routed through our products. We expect that sales of our Triton™ family of boards will represent an increasing percentage of our revenues in the future.



•

Xilinx, Inc provides chips for our Triton™ family of boards which allow our boards to work with digital communications lines.



•

Legerity, Inc provides chips for our Triton™ Analog product line which allow our board to work with analog communications lines.



•

Advantech provides the chassis for our AltiServ™ Office products based on our customer specifications.



•

BCM Computers manufactures our Internet protocol phone loaded with customized firmware to work with our system.

17

•

Fanstel Corporation manufactures our analog phone loaded with customized firmware to work with our system.

        Loss of any key component supplier would adversely impact our business.

EMPLOYEES

        As of September 30, 2004, we had 96 full-time employees, including 50 in research and development and support, 27 in marketing and sales, 7 in operations, and 12 in finance and administration. Of these full-time employees, 54 were located in the United States and 42 in China. Our future success will depend, in part, on our ability to continue to attract, retain and motivate highly qualified technical, marketing, engineering and management personnel.

Item 2. Properties

        As of September 30, 2004, our headquarters for corporate administration, research and development, manufacturing and sales and marketing occupied 32,000 square feet of space in Fremont, California. The lease expires on February 21, 2009. Outside the United States, we lease approximately 9,400 square feet of a facility in Shanghai, China, where we conduct administration, research and development, sales and marketing, and another 1,600 square feet of a facility in Beijing, China to serve sales and marketing functions. We believe that our existing facilities are adequate for our needs through at least the end of year 2005. We believe that any additional space we may need in the future will be available on commercially reasonable terms.

Item 3. Legal Proceedings

        On September 6, 2002, Vertical Networks, Inc. filed suit against us in the United States District Court for the Northern District of California, alleging infringement of Vertical Networks' U.S. Patents Nos. 6,266,341; 6,289,025; 6,292,482; 6,389,009; and 6,396,849. On October 28, 2002, Vertical Networks amended its complaint to add allegations of infringement of U.S. Patents Nos. 5,617,418 and 5,687,174. Vertical Networks filed a second amended complaint on November 20, 2002 to identify our products and/or activities that allegedly infringe the seven patents-in-suit. Vertical Networks seeks a judgment of patent infringement and an award of damages, including treble damages for alleged willful infringement, and attorneys' fees and costs. We filed an answer and counterclaims for declaratory relief on December 9, 2002. On December 26, 2002, Vertical Networks filed its answer to our counterclaims. Vertical Networks served its preliminary infringement contentions on us on April 9, 2003 and we served Vertical Networks our preliminary invalidity contentions on June 3, 2003 and July 14, 2003, respectively. To date, the parties have exchanged some discovery, but no depositions have been taken, and no motions are currently pending. On October 7, 2003, the parties filed a stipulation to stay this action, pending the outcome of the reissue of some of the subject patents before the U.S. Patent and Trademark Office. We believe we have strong defenses and arguments in this dispute and intend to vigorously litigate our position. Management's view is that any loss from this litigation is not probable or estimable.

        From time to time, we may become party to litigation and subject to claims arising in the ordinary course of our business. To date, these actions have not had a material adverse effect on our financial position, result of operations or cash flows. Although the results of litigation and claims cannot be predicted with certainty, we believe that the final outcome of such matters would not have a material adverse effect on our business, financial position, results of operation and cash flows.

Item 4. Submission of Matters to a Vote of Security Holders

        None.

18

Item 4A. Executive Officers of the Registrant

        The following table sets forth certain information with regard to our executive officers and their ages as of September 30, 2004:

        Gilbert Hu founded AltiGen and has served as our President, Chief Executive Officer and a director since May 1994. Before founding AltiGen, Mr. Hu was a founder, President and Chief Executive Officer of Centrum Communications, Inc., a networking company acquired by 3Com Corporation in early 1994. Mr. Hu has also served in technical and managerial roles at Vitalink Communication Corporation, an internet working equipment manufacturer. He received a Bachelor of Science degree in Electrical Engineering from National Chiao-Tung University in Taiwan and a Master of Science degree in Electrical Engineering from Arizona State University.

        Philip M. McDermott has served as our Chief Financial Officer since June 1999. From October 1995 to May 1999, Mr. McDermott served as Director of Finance for Americas Sales for 3Com Corporation. From October 1994 to October 1995, Mr. McDermott served as Vice President of Finance, Operations and Administration for DAVID Systems, a division of Chipcom Corporation, a public networking company. Chipcom was subsequently acquired by 3Com Corporation. Mr. McDermott received Certified Management Accountant accreditation from The Society of Management Accounting in Montreal, Canada.

        Michael Plumer has served as our Vice President of Sales since July 2004. Mr. Plumer joined AltiGen in November 1996 to begin building the AltiGen sales channel. In the past eight years he has held various positions including Senior Director of Sales and National Sales Director. From January 1994 until October 1996, Mr. Plumer worked for NetManage, Inc. Mr. Plumer received a Bachelor of Arts degree in Journalism and Public Relations from Iowa State University.

        Simon Chouldjian has served as our Vice President of Hardware Engineering since November 2001. Prior to this, he has served as our Vice President of Manufacturing from June 1997 to November 2001. From July 1984 to June 1997, Mr. Chouldjian was the founder and Vice President of Engineering of Luxcom, Inc., a manufacturer of communication hub equipment. Mr. Chouldjian has held supervisory and project leader positions in engineering at the Hewlett Packard Company and TRW, Inc. He received a Bachelor of Science degree in Electrical Engineering from the University of California, Berkeley and a Master of Science degree in Electrical Engineering from Stanford University.

        Tsyr-Yi (Shirley) Sun has served as our Vice President of Research and Development since October 1999. Prior to that role, she served as our Director of Internet Protocol Telephony from April 1998 to October 1999. From February 1994 to March 1998, Ms. Sun worked for 3Com Corporation as an engineering manager. From August 1991 to February 1994, Ms. Sun was a founder and an engineering manager with Centrum Communications, Inc., a networking company acquired by 3Com Corporation in early 1994. Ms. Sun received a Bachelor of Science degree in Mechanical Engineering from National Central University in Taiwan and a Master of Science degree in Computer Science from Utah State University.

19

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

        From October 4, 1999, the date of our initial public offering, to June 11, 2002, our common stock was traded on the Nasdaq National Market under the symbol "ATGN". Since June 12, 2002, our common stock has traded on the Nasdaq SmallCap Market under the symbol "ATGN." The following table sets forth the range of high and low sales prices for our common stock for the periods indicated:

        As of September 30, 2004, we had approximately 106 stockholders of record of our Common Stock. We have never declared or paid any cash dividends on our capital stock. We currently expect to retain future earnings, if any, to support operations and to finance the growth and development of our business. We do not expect to pay cash dividends in the foreseeable future.

        We received aggregate net proceeds of approximately $33.3 million from the initial public offering of shares of our common stock in October 1999. As of September 30, 2004, proceeds from our initial public offering have been used for working capital and general corporate purposes, including research and development of new products, sales and marketing efforts, general and administrative expenses and international expansion. The remaining net proceeds have been invested in cash, cash equivalents and short-term investments.

(1)

The number of shares reserved for issuance under the Company's 1999 Stock Option Plan will be increased on the first day of the Company's fiscal year by an amount equal to the lesser of; (i) 1,796,783 shares; (ii) 5% of the Company's outstanding shares on that date; or (iii) such lesser amount as determined by the Board of Directors. The number of shares reserved for issuance under the Company's 1999 Employee Stock Purchase Plan will be increased on the first day of each fiscal year by an amount equal to the lesser of; (i) 598,928 shares; (ii) 2% of the outstanding shares on that date; or (iii) such lesser amount as determined by the Board of Directors.

Item 6. Selected Financial Data

        This section presents selected historical financial data of AltiGen Communications, Inc. This section should be read carefully in conjunction with "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and the consolidated financial statements included in

20

this Form 10-K, including the notes to the consolidated financial statements. The selected data in this section is not intended to replace our consolidated financial statements.